Lower interest rates should boost growth.
If you would have asked me where SoFi Technologies (SOFI 0.51%) stock would be now at this time last year, I don’t think I could have predicted that it would be roughly flat. It was up 73% year to date at this time last year and gaining momentum.
I made some predictions about SoFi last June which were on the mark: more accounts, positive net income, and increased student loans. I also anticipated better performance if interest rates went down, which is fairly obvious, and it hasn’t yet happened. I thought SoFi had a strong long-term outlook, but I was more hesitant to say how high it would go in the near term. It was a cautious analysis, and it was the right one. As much as SoFi looks like it has all of the features that could make a great company and a great stock, it’s been dealing with intense external headwinds that have made it difficult for the company to exercise its potential.
Let’s look at how things could go over the next year.
Engagement: Increasing
SoFi’s financial services app offers a broad range of services targeting students and young professionals. It started out as a lending cooperative for recent grads, and its lending segment is still its largest. However, it has expanded into other services like bank accounts, investment accounts, and even travel. It also operates a white-label financial services infrastructure business called Galileo.
This combination has attracted millions of members at a fast-growing rate. Members increased 41% year over year to nearly 8.8 million in the second quarter, with products up 36%. SoFi’s model is to offer an expanded list of services to generate higher engagement, and this has resulted in a number of positive benefits for the company: higher sales, profitability at scale, and protection from pressure in its core business, which is lending.
There’s no reason to suspect that this will change any time soon, and a year from now, we can expect membership and engagement to be significantly higher than today.
Lending segment: Improving
Let’s talk about that pressure in lending. It’s the main reason investors have been on the outs with SoFi stock recently. Lending is its main segment by far, accounting for 55% of total revenue in the second quarter, although that percentage is lower than in the past.
Management touts the expansion model and how financial services are growing at a rapid pace, increasing 80% year over year in the second quarter. That’s true, and it inspires confidence.
But it’s also because the lending segment hasn’t been growing much. Lending revenue was up only 3% year over year in the second quarter.
The lending business also accounts for the vast majority of profits. It reported $198 million in second-quarter contribution profit, or almost four times the financial services portion.
Now that interest rates are starting to come down, the business is likely to shift back in SoFi’s favor, and SoFi is well positioned to jump-start its lending business over the next few months. Specifically, it should be able to capitalize on renewed interest in student loans and refinancing. If it can do that, it should be be able to grow at accelerated rates at this time next year.
Revenue: Steadily climbing
SoFi’s sky-high revenue growth has moderated over the past few years, but it’s still strong and steady. Net revenue increased 20% year over year in the second quarter, and management is guiding for a 20% rise in the third quarter and 18% for the full year.
As the expansion model does it job and lending goes back to work as well, SoFi’s revenue should be comfortably growing a year from now.
Profits: Rising higher
SoFi has become profitable at scale. Often, a company will swing back and forth between profits and losses on its way. However, SoFi became profitable with a bang, reporting three straight net profitable quarters, and it’s guiding for that to stay positive in the third quarter and for the full year.
Analysts are looking for earnings per share (EPS) of $0.11 in 2024 and $0.26 in 2025.
Stock: The big question
Last year at this time, the issue of high interest rates was still a big thorn in SoFi’s business. It hasn’t yet been alleviated, but with the Federal Reserve lowering interest rates, it should begin to resolve.
SoFi stock trades at a reasonable valuation for its growth rates and potential: 3.5 times trailing 12-month sales and 39 times forward one-year earnings.
It may not climb until the results come in, but the results are likely to come in positive soon, and the stock should quickly follow.
